Rulers, Religion, and Riches: Why the West Got Rich and the Middle East Did Not (Cambridge Studies in Economics, Choice, and Society)

by Jared Rubin

  Theoretically, the notables could have banded together to bargain with the sultan collectively. For instance, they could have consolidated their tax farms into larger farms, which would have unified their interests in opposition to the sultan. Eliana Balla and Noel Johnson (2009) note that seventeenth-century French tax farmers did so, thus acquiring the power to constrain the king. By combining their farms into a large partnership known as the Company of General Farms, French tax farmers could jointly withhold revenues from the king if he acted contrary to their wishes. Ottoman tax farmers, on the other hand, faced little incentive to act collectively in such a manner. For one, Islamic law disincentivized such partnerships. Islamic inheritance law mandates apportioning estates according to a preordained formula, and any heir could dissolve a partnership of which they inherited any part.48 Hence, a partnership of tax farmers unknown to each other from diverse locations would have been a highly risky proposition, as any heir could have dissolved the partnership upon the death of a member.

  Yet, even had Islamic law been more conducive to large partnerships, there was still less incentive for Ottoman notables to act collectively than there was for European tax farmers. The notables had power over their local population due to their family lineage – they were often descendants of Janissaries – so they were in a much better bargaining position vis-à-vis the sultan than individual European tax farmers were vis-à-vis their king. If the sultan transgressed the rights of notables or asked for exorbitant exactions, the notables could simply ignore the sultan while maintaining control over their locality. This was in fact a common occurrence. Notables frequently passed down their tax farms to their heirs instead of returning them to the state, causing the sultan to lose his ability to extract revenues from the farms. Some notables stopped sending revenues to the sultan altogether.49 This greatly decreased the state’s revenues – Ottoman tax revenues were much lower in the seventeenth and eighteenth centuries than in the previous two centuries – and it ultimately led to the failure of the malikane system, which the Ottomans phased out in the 1840s as part of a broader series of economic reforms.50

  There was another important difference between the notables and members of Western European parliaments: notables were seldom concerned with commercial activities. Some were involved in commercial agriculture, but those notables mainly sold cash crops to Europe using Christian merchants. Still other notables were involved in trade, but this was relatively uncommon. Notables generally gained their position through the administrative ranks or through family or tribal ties – not through involvement in economic activities. Indeed, the decentralized nature of Ottoman tax farming arrangements and weak property rights over the farms created perverse incentives. Tax farming was far more lucrative than investing in agriculture, trade, or industry was. Since property rights over the tax farms were insecure – the sultan regularly confiscated tax farms in the eighteenth century – notables generally focused on extracting tax revenue at the expense of commerce. Even though more commercial activity would have meant greater future tax receipts, tax farmers had no assurance that the sultan would refrain from seizing the assets of the most successful farms.51

  As a result, merchants, manufacturers, and money changers never gained a say in government that was close to resembling their power over local economic issues, and they certainly had much less ability to affect policy than their European counterparts.52 The upshot was that policies favored the state and the notables at the expense of the economic elite. Policies restricting private capital accumulation and favoring state ownership of land and other property remained throughout most of the 600-year life of the empire. Property rights were highly irregular, and the sultan could revoke them in time of need. For instance, Mehmed II (r. 1444–1446 and 1451–1481) confiscated land held by both private owners and pious foundations (waqf) multiple times during his reign.53 Mehmed “the Conqueror” was able to get away with such transgressions because he was one of the most legitimate rulers in Ottoman history due to his status as the “conqueror of Constantinople.” But these confiscations were wildly unpopular with the many constituencies harmed by them; their magnitude alarmed even the religious establishment. This presented a problem for Mehmed II’s son and successor, Bayezid II (r. 1481–1512), who did not have his father’s legitimacy via personal accomplishment and needed these groups to propagate his rule. Bayezid II sought reconciliation with them and reversed many of his father’s confiscations.54 Centuries later, after the prospect of gaining additional revenues from territorial expansion became a fading memory, sultans turned back to transgressing property rights. For instance, in 1714, the sultan retracted tax farming contracts in many of the provinces, only to reinstate them three years later at 50 percent of their original bids. By the late eighteenth century, confiscations of tax farms were commonplace.55

  This situation was fundamentally different from the one in Western Europe, and especially Protestant Europe, where the relatively weaker position of rulers required them to bargain with all of the economically powerful parties: the nobility, church, and the economic elite. Had Protestant rulers, and to a lesser extent Catholic rulers, ignored any of these three factions, they not only stood to lose tax revenue but also faced a greater threat of revolt. Yet, the irony noted in the Spanish case was even starker for the Ottomans: the sultan’s strength was precisely what facilitated Ottoman long-run weakness. By relying on the notables, the Ottomans captured much of the available tax revenue while also limiting the possibility of revolt.56 Sure, the sultan could have increased tax revenues even further by bringing the economic elite into the fold, but this would have come at the cost of ceding rights and bargaining power. Their cost-benefit calculation was different than the one faced by Protestant rulers. While this calculation incentivized Protestant rulers to make concessions to the economic elite in order to bolster their tax revenue and propagate rule, the lower benefits available to the Ottomans from doing so did not outweigh the significant costs of these concessions. In other words, the sultan’s strength vis-à-vis other elites discouraged them from pursuing policies that would ultimately enrich the state.

  These differences between the Ottoman Empire and Protestant nations affected the types of policies enacted in each region. Since the Ottomans did not negotiate with the economic elite, there was never much incentive to adapt commercial law codified in the Shari’a to reflect the changing needs of merchants and money changers. Doing so would have threatened the religious elite, who were the sole interpreters of religious law – and hence the sole interpreters of commercial law as codified in Islamic doctrine. Why should the sultan have undermined the clerical class – his primary source of legitimacy – for the benefit of the economic elite, a group with no seat at the bargaining table? There was simply little incentive for the Ottomans to modify commercial laws in response to changing economic circumstances, since they were able to acquire tax revenue without ceding much to the economic elite. This logic also helps explain why there was little demand from the economic elite for changes in commercial law, as noted in numerous works by Timur Kuran. If the sultan was unlikely to grant such changes in any case, why would one circumvent laws or appeal directly to the sultan, when doing so carried potential sanctions from both the religious and political elite? Such a “double cost,” as described in Chapter 2, disincentivized the economic elite from seeking changes to commercial laws.57

  The Ottomans did, however, readily modify some laws. Since the Shari’a was more of an ideal law and not always practicable, the kanun (the Law of the Empire) supplemented the ideal with laws supporting the day-to-day needs of the state, particularly in criminal and fiscal law. The kanun and Shari’a were not always mutually consistent, and when they clashed, the religious establishment generally found some way to cloak the sultan’s desires in a veil consistent with Islamic principles. The first major reform of the Ottoman legal code offers an example. Soon after Mehmed II conquered Constantinople, he instituted his first legal code, which system
atized tax collection across all aspects of society.58 After his reign, the Ottomans applied secular law in tax matters, allowing the sultan to skirt Islamic dictates. Where tax law ran contrary to Islamic law, the sultan was more than willing to augment the law in his favor.59 Since the Ottomans negotiated with individual military elite and eventually notables over tax revenues, they had much to gain from flexibility with respect to tax law and land tenure. There was much less to gain from flexibility in commercial law, so the Ottomans largely allowed this to remain the purview of the religious establishment.

  Allowing religious authorities purview over commercial law affected Ottoman commercial and financial policies as well as the type of economic institutions and financial instruments employed by the Ottoman economic elite. For instance, Chapter 4 noted that although merchants and lenders were easily able to circumvent Islamic restrictions on taking interest, they did so by incurring transaction costs that stifled the development of such large-scale lending institutions as banks. As a result, lending remained relatively small in scale and conducted primarily among known relations. It was not until 1856 that the first successful bank opened, and even this bank’s financial backers were primarily British and French.

  Timur Kuran spelled out in a series of articles and books numerous other ways in which the Ottoman reliance on Islamic law in commercial transactions stifled economic growth. One of his important examples involves the widespread use of waqfs, or pious trusts, in the provision of public goods. The waqf functioned similarly to an English trust, but with a mission fixed in perpetuity. Waqfs generally funded some immovable public good like a fountain or school. This meant that if a waqf founder ordered that the waqf fund a madrasa, then funds emanating from that waqf could only support madrasa expenses. Waqfs had a religious dimension, too; the provision of a waqf was viewed as a pious act, and waqf founders generally gained social prestige. An unintended consequence of waqf law was that wealthy Muslims founded them as a means of evading inheritance laws. Since a waqf was a perpetual entity, one could found a waqf and pay a handsome sum to an heir to run it. The upshot is that the waqf gave wealthy Muslims a means for avoiding the splitting up of assets required by Islamic law. Kuran (2001, 2005b, 2011) argues that waqfs therefore absorbed capital that could have been invested in more productive pursuits, or at least in investments whose mission was not fixed.

  Kuran (2005b, 2011) also argues that Islamic laws of inheritance were a primary reason that partnerships remained relatively simple throughout most of Islamic history. In both medieval Europe and the Ottoman Empire, partnerships constituted a key vehicle for combining capital and expertise. As such, they allowed for economies of scale and complementarities that would have otherwise been unavailable. Such economies of scale grew even greater as partnerships expanded to include many members. This type of growth occurred in Europe as basic partnerships (commenda) grew into family firms, joint-stock companies, and eventually corporations. A similar progression never occurred in the Ottoman Empire or the broader Islamic world. Indeed, Islamic partnerships remained small in scale and limited in time horizon. Kuran points to Islamic laws of inheritance and laws on partnerships as joint culprits. He notes that Islamic inheritance law split up inheritances among numerous heirs according to predetermined Qur’anic dictates, while partnerships immediately dissolved upon the death of any member. Although the heirs of a deceased partner could immediately reconstitute the dissolved partnership, the cooperation of all heirs was required. This clearly dampened the incentive to form partnerships with many members, or even to form long-lasting partnerships within a family, as was common in late medieval Italy. Whenever any member died, numerous heirs split their portion of the partnership, any of whom could prevent the partnership from continuing as it had. Hence, if any of the heirs were in a financial bind, the partnership was likely to dissolve. The dissolution could strike a major blow to partnership operations and the financial fortunes of all involved. It could force the original partners to dishonor already agreed-on contracts for lack of available funds, force the selling off of indivisible goods, or force the cancellation of operations critical to the partnership’s viability, such as shipments or large purchases. The easiest way to avoid this fate was to simply avoid partnerships with many members, as each additional member increased the probability that the partnership would unexpectedly dissolve. It also discouraged partnerships engaged in long-term dealings, since the longer the horizon of the undertaking, the greater the likelihood that one of the partners would unexpectedly die.60

  Ottoman jurists could have addressed the foregoing problem had they desired. But changes to inheritance or partnership laws would have required a reinterpretation of Islamic law, which was costly to the religious establishment because one of their key sources of influence – what made them elite – was their monopoly over the interpretation of eternal laws (see Chapter 2). Since such reinterpretation was costly, it would have taken a valuable reward to encourage it. But such rewards never arose, and the argument laid out earlier explains why. An equilibrium emerged where the sultan was happy to give the religious establishment purview over commercial law; the religious establishment in turn legitimized the sultan; and the economic elite remained relatively powerless. Had the sultan been in a more precarious position or relied on the economic elite for revenue, he might have modified commercial law to address their changing needs. However, the economic elite had no capacity to encourage legal changes more conducive to large, long-lasting partnerships. The two parties who interpreted and enforced the law had little interest in reinterpreting the law in such a manner.

  A different process evolved in Europe, and particularly in England, where the corporate form emerged in part due to the prevalence of trusts, the closest Western equivalent to the waqf. The Statute of Uses (1535) encouraged English landowners to place their property into trusts that owners could use in nearly any desired manner – contrasting markedly with Islamic waqf law (see Chapter 7). The Statute of Wills (1540) made land devisable by will, allowing landowners to bequeath land to anyone they desired by writing a will. This too differed markedly from Islamic inheritance law, which prescribed preordained splits of inheritance. These two English laws encouraged the concentration of wealth and, over time, investment in large ventures. On the other hand, the strict and complex code of Islamic inheritance encouraged wealthy Ottoman subjects to invest their wealth in waqfs. Waqfs had the benefit of perpetual life while also allowing for asset concentration, but this came at the cost of inflexibility for trustees as economic conditions changed. The Ottomans could have avoided such problems with the types of wills and flexible trusts that emerged in post-Reformation England. Wills help prevent the fragmentation of inheritances, while flexible trusts allow heirs to invest assets efficiently. Neither of these were attributes of Islamic law, however. And since the sultan had little incentive to remove authority over commercial law from the religious establishment, partnerships remained relatively simple, exchange remained relatively personal, and the corporate form never emerged indigenously.

  Unconstrained by the economic elite, the sultan had numerous tools at his disposal in times of fiscal crisis. One such tool used in the late sixteenth century, at the start of the first serious fiscal crises, was currency debasement. A major currency debasement took place in 1589, causing the Janissary corps to revolt; the sultan paid the corps in nominally fixed wages, so the debasement diminished the purchasing power of their wages. Many debasements followed, and in the 1640s, European coins replaced Ottoman coinage, which disappeared from circulation.61 Indeed, Şevket Pamuk (2000) argues that debasements were the primary cause of increasing price levels throughout Ottoman history. The economic elite and laborers despised debasements, as they were ostensibly an additional tax on income and wealth.62

  The Ottomans were not the only great power that debased their currency in the early modern period. Henry VIII instituted England’s “Great Debasement” in 1542 in order to pay for the growing fiscal burden of
war, and between 1542 and 1551, the value of English currency dropped dramatically. But there were two important points of contrast between the English and Ottoman debasements. First, Henry VIII debased the currency precisely because the power of Parliament had just increased with the Reformation. Debasement was one of the few fiscal policies the English Crown had at its disposal that did not require Parliament’s consent. Second, the English Crown was far from immune to monetary pressures created by the debasement. Edward VI’s government installed a set of reforms in 1551 to “rebase” the currency, ultimately culminating in the Elizabethan rebasement of 1560.63

  Another feature of a well-functioning economy that was lacking in the Ottoman Empire was an impartial judicial system. Analyzing court registers from seventeenth-century Istanbul, Timur Kuran and Scott Lustig (2012) found that Islamic courts showed bias against non-Muslims and in favor of government officials. The pro-Muslim biases almost certainly stemmed from Islam’s legal requirement of a higher level of evidence to prosecute Muslims than for prosecuting non-Muslims. As for the biases in favor of government officials, they were likely due to the fact that judicial appointments were made by the sultan; judges concerned about their careers sought to please litigants working directly for the sultan.64